The Mental Health Doomsday Clock ... And Midnight Approaches.

“It's no use talking about the 'Doomsday Clock' when it has already chimed. But, alas, the chimes fell on deaf ears.”

Anthony T. Hincks,  Author

The symbolic Doomsday Clock represents the likelihood of a human-made global disaster. Maintained since 1947 by the members of the Bulletin of the Atomic Scientists’ Science and Security Board, it originally was an analogy for the threat of global nuclear war. But, since 2007 it has also included climate change and new developments in life sciences and technology that could cause permanent harm to humanity.

The clock represents the hypothetical global catastrophe as "midnight" and the Bulletin's opinion on how close the world is to a global catastrophe as a number of minutes until midnight. Its original setting in 1947 was seven minutes to midnight. It has been set backward and forward 23 times since then, the smallest-ever number of minutes to midnight being two (in 1953 and 2018) and the largest seventeen (in 1991).

The Doomsday Clock scenario is tailor-made for the mental health field and specifically, the eating disorder industry. This is particularly true for the following reasons:

(1). Private equity firms have taken over residential treatment centers due to the passage of the Mental Health Parity Act and the Affordable Care Act.

(2). There is a lack of government oversight and no legislative guidelines in place to monitor or regulate the industry.

(3). A prominent doctor in the eating disorder industry testified while under oath that there is a lack of empirical data on the effectiveness of residential treatment.

(4). Despite the enactment of the Mental Health Parity Act, recent studies indicate insurance providers are more closely evaluating and denying extended treatment at residential programs.

(5). A high and escalating debt/equity ratio indicating perceived growth is in actuality, merely refinanced debt structure combined with a lack of tangible assets make future transactions problematic if not doubtful and bankruptcy more likely.

(6). Loans and debt payments exceeding in some instances over one hundred million dollars are coming due and must be restructured or paid and if not, will result in bankruptcy at the very least.

When taking these issues into account, one can surmise that the delicate house of cards upon which the residential treatment industry has been built is teetering and we are approaching Midnight on the Mental Health Doomsday Clock.

And now, the first card has fallen.

Private Equity investment led to … Bankruptcy 

In 2018, HCR ManorCare, the second largest nursing home chain in the United States, filed for bankruptcy. In 2007, the Carlyle Group, one of the wealthiest private-equity firms in the world acquired HCR ManorCare.

The Washington Post conducted an investigation into HCR ManorCare and the Carlyle Group and published an extensive article in November 2018. In the article, the Post noted that the deal immediately faced protests from critics who said the aggressive tactics of private-equity firms are ill suited for companies that tend to some of society’s most vulnerable. From the start, Carlyle’s acquisition of HCR ManorCare made the company’s finances more risky because the transaction burdened it with billions in long-term debt.

Carlyle and investors then exacerbated the financial situation by completing a 2011 financial deal that extracted $1.3 billion from the company for investors while saddling HCR ManorCare with what proved to be untenable financial obligations. Under the terms of that deal, HCR ManorCare sold nearly all of the real estate in its nursing home empire and then agreed to pay rent to the new owners. This kind of deal, known as a sale-leaseback, is a common tactic of private-equity firms, and it generated financial benefits for Carlyle and its investors. The rent HCR ManorCare was obliged to pay — to occupy the nursing homes it had once owned — amounted to $472 million annually, according to legal filings. The rent was set to escalate at 3.5 percent a year, and according to the lease, HCR ManorCare also had to pay for property taxes, insurance and upkeep at the homes.

Because of this 2011 transaction, HCR ManorCare’s long-term financial obligations had risen from less than $1 billion to over $5 billion, according to financial statements. The real estate deal yielded enough money to help the company pay down some of that debt. But the deal also meant that HCR ManorCare had to make massive rent payments to its new landlord, and these, according to the company’s accounting, raised the company’s long-term financial obligations to $6 billion.

In addition, Carlyle received annual “advisory fees” from the companies that it purchases — essentially; Carlyle pays itself to manage the companies it owns. The Post disclosed that at HCR ManorCare, those fees averaged about $3 million a year from 2007 to 2015, or about $27 million, according to documents and interviews. That money was also distributed to Carlyle and its investors.

Carlyle also received a “transaction fee,” which is money Carlyle receives when it buys a company, typically 1 percent (1%) of the purchase. The $6.1 billion HCR ManorCare purchase price, yielded Carlyle $61 million, Carlyle officials confirmed. That money was distributed to Carlyle and its investors.

The increasing financial burden and long term debt obligations led to the inevitable deterioration of the services it provided and the health conditions in the nursing homes.

Under the ownership of the Carlyle Group, for the five years preceding the bankruptcy filing, HCR ManorCare exposed its roughly 25,000 patients to increasing health risks, according to inspection records analyzed and reported by The Post. “The number of health-code violations found at the chain each year rose 26 percent between 2013 and 2017, according to a Post review of 230 of the chain’s retirement homes.”

The Post quoted Andrew Porch, a consultant on quality statistics to whom HCR ManorCare referred questions about health-code violations, “Carlyle was a very interesting group to deal with. They’re all bankers and investment people. We had some very tough conversations where they did not know a thing about this business at all.”

The Post interviewed financial experts familiar with HCR ManorCare who stated that it was massive financial obligations that led the company to bankruptcy. The company had been “over-levered” with debt. Chad Vanacore, vice president and research analyst of health-care providers at Stifel, the investment bank stated, “I think it’s fair to say they were over-levered.” Tom DeRosa, chief executive of Welltower, a company that acquired HCR ManorCare’s real estate after the bankruptcy, said in an interview at a real estate conference, “HCR ManorCare was doomed. It was over-levered, and it couldn’t work under the capital structure that had been crafted.”

And after the private equity owners enrichened themselves, HCR ManorCare was left financially devastated, picked apart in its bankruptcy and sold piecemeal while leaving a trail of elderly who suffered and died as a result of the short-sightedness and greed.

Is Acadia Healthcare Next?

We previously reported that Acadia Healthcare Company, Inc. is ripe for financial disaster. We previously reported that in a 7 year time period, Acadia expanded its operations to a total of 584 behavioral health care facilities in the United States, the United Kingdom and Puerto Rico with approximately 17,800 beds. Of those 584 facilities, 256 allegedly treat eating disorders in some fashion. Included amongst these 256 facilities are McCallum Place, based in the State of Missouri and Timberline Knolls, based just outside of Chicago, Illinois.

Acadia is now one of the largest mental health system providers in the United States. And according to Penn Little, the Managing Partner of Bar Nothin’ Capital Management based out of Chicago, Illinois it could be on the verge of financial collapse. Reports and rumors from last month were that Acadia was positioning itself to be sold to Kohlberg, Kravis, Roberts & Company and then taken private. But these talks have stalled as reports of long term debt in the amount of $3.2 billion are come to light. Mr. Little’s research also found that many of the Acadia facilities are woefully understaffed. Further, Mr. Little reiterated that if interest rates climb, Acadia is approaching the point where it will be very difficult for it to pay its debt.

Other issues are conspiring against Acadia. Emily Evans, a health care director at Hedgeye Risk Management stated, “Acadia is also hurt by the fact that health insurance payments for mental health and addiction services are “bad” right now despite federal parity laws.”  

As the sale to KKR looks ever more remote, Acadia stock plummeted 14%. Finally, of the greatest immediate concern to McCallum, Timberline Knolls and other entities owned by Acadia, is that the Chief Executive Officer of Acadia, Joey Jacobs reportedly stated that he might prune ten percent (10%) or more of the lower performing British centers by shutting them down. What that means is that with the stroke of a pen, Mr. Jacobs and his board can shut down treatment centers if they do not generate enough revenue. And the question remains, if that is the inevitable action, how many people will die because they happen to be in a treatment center that does not financially perform to Mr. Jacobs’ satisfaction?

And Finally …

As we stare at the possible financial apocalypse, we must be reminded of the debt we know Eating Recovery Center has incurred: $30 million senior secured revolving credit facility expiring in 2022;  a $190 million senior secured first lien term loan due in 2024, and; a $30 million senior secured delayed draw term loan due in 2024. You may add management/advisory fees being paid to CCMP Capital Advisors and transaction fees to its equation. ERC’s Doomsday Clock has a definite midnight date and the results will be far worse than a glass slipper being lost.

The reality and the horrible ramifications of having private equity own the eating disorder industry, from the halls of the treatment centers to the halls of Congress have arrived. Our children are dying. Our loved ones still suffering are subjected to vood00-based treatment with no roots based in objective, scientific research. Treatment is monetary based. An incompetent practitioner who sexually took advantage of a patient is allowed to continue to practice with no tangible ramifications. Hundreds of people suffering from this insidious disease are kicked out of outpatient treatment on a concocted, bogus excuse while spokespersons for that treatment center try to spin the reality of their reprehensible conduct.

And so parents, it is up to you. Your children’s lives depend on you. You must not back down nor let fear dictate your course. Arm yourself with facts and be bold. Embrace the message of Admiral William McRaven, who in a commencement speech given at the University of Texas said these powerful words, “So, if you want to change the world, start each day with a task completed. Find someone to help you through life. Respect everyone. Know that life is not fair and you will fail often. But if you take some risks, step up when the times are the toughest, face down the bullies, lift up the downtrodden, and never ever give up, if you do these things, the next generation and the generations that follow will live in a world far better than the one we have today. And what started here, will indeed have changed the world for the better.”

Change the world.